The great British pub is facing hard times, and they are going to get tougher, according to Deutsche Bank (DB).
Harder times will throw the spotlight more on free cash flow and the pub operators’ ability to self-fund investment, and in that contest there is a clear winner in DB’s view: Greene King PLC (LON:GNK).
“Only Greene King can self-fund all of its capex (maintenance and growth) and pay a dividend from free cash flow. All the other sector companies we cover either require disposals or pay no/reduced dividends,” the German bank said in a review of the sector.
Overall, DB remains cautious on the pubs & restaurants sector, which is facing a growing number of cost head winds. There is a concern that an unclear economic outlook will undermine UK consumer confidence and spending, which naturally will have an effect on the trading of pubs.
Despite the cautious view, it is a buyer of Greene King and also E I Group PLC (LON:PLC), which used to be known as Enterprise Inns.
Both have self-help – often broker code for cost-cutting – agendas that should provide some protection from sales and margin pressures.
J D Wetherspoon PLC (LON:JDW) is on the ‘sell’ list, as DB thinks it will struggle to lift prices enough to offset rising costs.
The bank sits on the fence with Marston’s plc (LON:MARS) and Mitchells & Butlers PLC (LON:MAB), giving both of them ‘hold’ ratings.
To an extent, the valuations of sector constituents already reflect the negative sentiment, but DB sees few positive share price catalysts coming down the road.
“We argue that the sector has already been de-rated to reflect uncertain trading prospects; however, we see few short to medium-term catalysts for a change in sentiment, hence our preference for companies with scope to invest and drive a self-help agenda,” Deutsche concluded.